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3 Things Amazon.com, Inc. CEO Jeff Bezos Wants Investors to Know

According to its founder, the company has evolved well beyond just a single business.

Amazon(NASDAQ:AMZN)CEOJeff Bezos likes to talk about his business, but he is often stingy with the details.

In his most recent letter to shareholders, however, he opened up and shared his thoughts on company strategy. He not only laid out what he believes a business needs to succeed:

A dreamy business offering has at least four characteristics. Customers love it, it can grow to very large size, it has strong returns on capital, and it's durable in time -- with the potential to endure for decades. When you find one of these, don't just swipe right, get married.

But he explained how Amazon was working to create not just one business worth "marrying" but multiple such offerings:

After two decades of risk taking and teamwork, and with generous helpings of good fortune all along the way, we are now happily wed to what I believe are three such life partners: Marketplace, Prime, and AWS. Each of these offerings was a bold bet at first, and sensible people worried (often!) that they could not work. But at this point, it's become pretty clear how special they are and how lucky we are to have them.

This is not the first time the CEO has talked about Marketplace, Prime, and AWS, but it is the most in-depth discussion he has ever offered.

Marketplace was not an easy roadWhile Amazon Marketplace -- the offers to purchase items from third-party sellers that appear alongside company listings -- are now well-integrated into the site, Bezos reminded shareholders that was not always the case. He took readers through the evolution of the division which started as an auction site and joked that "seven people came, if you count my parents and siblings."

Despite those early struggles, the Marketplace (under a number of different names) went from accounting for "5% of units" sold in its first year to now where Bezos wrote, "more than 40% of our units are sold by more than two million third-party sellers worldwide. Customers ordered more than two billion units from sellers in 2014."

Though the idea of letting third-party sellers compete directly with the company seemed like it could harm direct sales, the hybrid model actually accelerated the growth of the company according to the CEO:

Customers were initially drawn by our fast-growing selection of Amazon-sold products at great prices with a great customer experience. By then allowing third parties to offer products side-by-side, we became more attractive to customers, which drew even more sellers. This also added to our economies of scale, which we passed along by lowering prices and eliminating shipping fees for qualifying orders.

Amazon, the CEO explained, has been able to leverage that model across the globe, and success in one country leads to success in another. "Almost one-fifth of our overall third-party sales now occur outside the sellers' home countries, and our merchants' cross-border sales nearly doubled last year," he wrote.

Prime drives the companyBezos explained that Prime has always been a bit of a gamble for the company. In the early days, the company "gave up many millions of dollars in shipping revenue, and there was no simple math to show that it would be worth it." Despite that, he believed strongly in the concept and felt that customers would ultimately understand the deal they were getting and sign up, giving the company the scale required to lower the cost of shipping.

Well, those early investments paid off and allowed the company to create "large-scale systems to automate much of inventory replenishment, inventory placement, and product pricing." That has led its shipping operation to expand from 13 fulfillment centers in 2005, when Prime launched, to 109 this year. The centers themselves have improved and now include "more than 15,000 robots to support the stowing and retrieval of products at a higher density and lower cost than ever before."

Bezos explained that the expansion into video and other areas may also not seem like obvious money makers, but company tracking shows that they are.

"We watch Prime free trial starts, conversion to paid membership, renewal rates, and product purchase rates by members entering through this channel," he explained. "We like what we see so far and plan to keep investing here."

AWS keeps getting biggerThis quarter marked the first time Amazon broke out revenue for its cloud services business, and in line with that, Bezos added his thoughts. When AWS was launched, he explained, the goal was to offer "on-demand, pay-as-you-go cloud storage and compute resources dramatically increased the speed of starting a new business." In the early days, he wrote, start-ups were the first adopters, but that has changed.

"Large enterprises have been coming on board as well, and they're choosing to use AWS for the same primary reason the start-ups did: speed and agility," he wrote. "Having lower IT cost is attractive, and sometimes the absolute cost savings can be enormous."

Bezos does not believe cost savings alone would "overcome deficiencies in performance or functionality." Instead, AWS has succeeded because it offers a "better and faster" solution.

"Enterprises are dependent on IT -- it's mission critical. So, the proposition, 'I can save you a significant amount on your annual IT bill and my service is almost as good as what you have now,' won't get too many customers," he wrote. "[T]he cost savings is the gravy, not the steak."

The CEO offered additional color noting that AWS has more than a million active customers as companies and usage grew by approximately 90% in the fourth quarter of 2014 versus the prior year. He also said that the division was still in its beginning stages.

"We've increased our pace of innovation as we've gone along -- from nearly 160 new features and services in 2012, to 280 in 2013, and 516 last year," he wrote.

Author

Daniel B. Kline is an accomplished writer and editor who has worked for Microsoft on its Finance app and The Boston Globe, where he wrote for the paper and ran the Boston.com business desk. His latest book, "Worst Ideas Ever," (Skyhorse) can be purchased at bookstores everywhere.
Follow @tworstideas